Manufacturing sector output is still growing

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The first report on the state of UK manufacturing in 2008 suggests that the sector has yet to suffer the slowdown that is affecting other parts of the economy. The Purchasing Managers Index (PMI), produced by the Chartered Institute of Purchasing and Supply (CIPS) and NTC Economics, shows that while the manufacturing sector lost some momentum in December, output increased for the 29th successive month, and exports climbed for the 16th month running, mainly driven by demand from mainland Europe.

But there was a noticeable easing in the expansion rate of new orders as the rate of growth in order books fell to its lowest since March 2006.

Production expanded during December with companies indicating that they are sustaining the higher output through a marked reduction in the level of outstanding business at their plants. Work-in-hand fell at its fastest rate for two-and-a-half years.

"December saw a drop in momentum within the UK manufacturing sector as purchasing mangers reported an easing in the rate of new order growth," comments Roy Ayliffe, director of professional practice at the CIPS. "Although the past year has seen an increase in new orders, demand from both the domestic and foreign markets dropped in December as firms felt the effects of recent economic uncertainly and the weakening of the US dollar.

"Companies are also continuing to battle against inflationary pressures, especially for essentials such as fuel, metals and oil," he adds. "Despite this, some firms postponed planned price rises as a result of the weakening growth in new orders. On a more positive note though, employment levels have continued to rise in 2007 and December was no exception as firms added to staffing levels to meet rising production requirements."

According to NTC economist Rob Dobson, the loss in momentum during December "was the result of a noticeable easing in the rate of expansion in new orders, with demand for investment goods being especially weak. Client confidence is still being affected by tight credit market conditions and high cost inflation, leading many to postpone non-essential expenditures.

"Exporters are also experiencing reduced competitiveness in dollar-denominated markets due to exchange rate factors, although exports to mainland Europe are holding up comparatively well," Dobson adds. "Manufacturers may have been able to initiate a robust expansion of production through the run-down of previously agreed work in December, but growth of output may downshift further in Q1 2008 without a near-term improvement in market conditions."

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